PEP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for PepsiCo's earnings for fiscal 2020's 16-week fourth quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 11, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about PepsiCo. 

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

Shares of PepsiCo now trade for about $140 each, giving the company a market value of $195 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices. 

PepsiCo recorded profits of $7 billion on revenue of $69 billion during the last year. In the quarter that ended on September 5, 2020, PepsiCo earned $1.66 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $18.1 billion, 5 percent more than last year's $17.2 billion. The Beverages North America business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 5.6 percent compared to the year-earlier result. The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 7.2 percent. The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.1 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

PepsiCo updated its guidance for the fiscal year and, thus, the fourth quarter, after the company last reported quarterly results.  The key elements of the guidance are excerpted below:

The Company provides guidance on a non-GAAP basis as we cannot predict certain elements which are included in reported GAAP results, including commodity mark-to-market net impacts.

Based on our year-to-date results and what we can reasonably forecast for the balance of this year, we are providing an update to our full-year financial outlook today. The Company now expects:

•Full-year organic revenue growth to be approximately 4 percent;

•Full-year core earnings per share of $5.50 compared to 2019 core earnings per share of $5.53; and

•Approximately $10 billion in cash from operating activities and free cash flow of approximately $6 billion, which assumes net capital spending of approximately $4 billion.

In addition, the Company continues to expect:

•A core effective tax rate of approximately 21 percent; and

•Total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of approximately $5.5 billion and share repurchases of approximately $2 billion.

Note that the guidance refers to non-GAAP earnings, which makes my task a little more difficult and amplifies the uncertainty of my estimates.

In the first three quarters (only 36 weeks at PepsiCo, but that's another story) of fiscal year 2020, organic Revenue growth was 3.6 percent and GAAP Revenue growth was 3.0 percent.  To get to 4 percent organic growth across the full fiscal year, as the guidance predicts, I've assumed the difference between GAAP and non-GAAP revenue growth will remain 0.6 percent.  This suggests that 3.4 percent (4.0 - 0.6) is a plausible estimate for GAAP revenue growth for the fiscal year.

In fiscal year 2019, PepsiCo's revenue was $67.2 billion.  Fiscal year 2020's revenue could, therefore, be 1.034* $67.2 billion = $69.5 billion.  Revenue during the first three quarters of the year was $47.9 billion, which leaves $69.5 billion - $47.9 billion = $21.6 billion for the fourth quarter of fiscal 2020.

During the first three quarters of the year, PepsiCo's Gross Margin averaged 55.4 percent.  The margin the fourth quarter is usually a little less, so I have assumed it will be 55 percent.  The Cost of Goods Sold estimate is, therefore, (1-0.55) * $21.6 billion = $9.7 billion.

Sales, General, and Administrative (SG&A) expenses have averaged 40.4 percent of Revenue during the first three quarters.  In the fourth quarter, this ratio is often 2 to 3 percent higher.  I don't think it will be quite that high this year, but it could see 42 percent as a possibility.

These estimates would lead to Operating Income of $2.8 billion, up from $2.7 billion one year earlier.

I assume net interest paid would drop to $400 million in this era of low rates.

For the income tax rate, I used the non-GAAP estimate of 21 percent.  The difference between the GAAP and non-GAAP rates is usually small.

With these assumptions, my estimate for Net Income is $1.93 billion ($1.39 per share), which compares favorably to $1.77 billion (1.26/share) in the year-earlier period.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#pepsico  #pep  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis